Edvantage Group reported 1HFY22 revenue of Rmb823m (+8% YoY) and adjusted net revenue to shareholders of Rmb264m (+32% YoY). Both revenue and earnings growth were in line with our expectation. Surge in revenue was due to rising enrolments and tuition, as well as consolidation of newly acquired Urban Vocational College of Sichuan (UVCS), Urban Technical College of Sichuan (UTCS) and Huashang Technical School (HTS). In addition, the company will pay interim dividend of HK$0.084 per share. Shareholders can decide to acquire dividend through either cash or new shares. Dividend yield has reached 6.5% on a cash basis.
　　Robust organic growth. As Gaokao candidates rose to 0.78m in Guangdong in 2021 and gross enrolment ratio of Guangdong was 52%, 5.8ppts lower than national average, schools in Guangdong were benefited from growing enrolment quotas. In SY21/22, Huashang College and Huashang Vocational College booked enrolment growth of 6.8% and 29.3%. Thanks to high-quality strategy and relax in pricing limit in both Guangdong and Sichuan, tuition fee continued to rise. Hence, Edvantage Group achieved organic revenue growth of 25%. The company is expanding campuses for rising enrolments, while tuition is expected to grow as average costs per student for public universities and junior colleges were Rmb36k and 21k. Thus, we believe the logic of rising enrolments and tuition is still legit.
　　Net margin dropped. Gross margin reached 50.2% (+0.2ppts YoY) in 1HFY22, while adj. net margin to shareholder declined by 4ppts YoY to 32.1%. Plunging adj. net margin to shareholder was due to the consolidation of UVCS, UTCS and HTS, and G&A expenses rose by 94% YoY in 1HFY22. Of note, as the company consolidated UVCS and UTCS for 6 months in 1HFY22 vs. 2 months in 1HFY21, merged schools with lower net margin impacted margins of Edvantage Group more in 1HFY22. With on-going post- investment management, we believe G&A expenses may reduce in the future, improving net margin. The company is also developing vocational training business, driving other income to rise by 130% YoY, accounting for 5.1% (+1.8ppts YoY) of total revenue. With the growth in vocational training business, surging other income is expected to drive margins.
　　Maintain BUY. Thanks to the great location of schools, construction of new campuses and high-quality strategy, rising enrolments and tuition will lead the organic growth as the company will obtain the dividends of development in provinces with scarce educational resources. However, with the pressure on expenses from acquired schools, we will pay attention to post-merger management. Hence, we lower our adj. net profit forecast to Rmb555m, 665m and 763m for FY22E, FY23E and FY24E, representing EPS of Rmb0.52, 0.62 and 0.71. We lower TP to HK$3.35 and maintain Buy.
　　Risks: losing brands harms enrolment quotas; raise in tuition is less than expected.